10 Accounting for Sales and Cash Receipts

1 Describe merchandise sales transactions.

Merchandising Business Purchases merchandise from vendors/suppliers and sells that merchandise to customers A sale is a transfer of merchandise from one business or individual to another in exchange for cash or a promise to pay cash

Retailer Sells to final consumers Evidenced by: Cash register tape Sales ticket One copy of the sales ticket is given to the customer and the other copy is sent to accounting

Wholesaler Purchases merchandise from the manufacturer Sells to retailers Usually “on account” A sales invoice is generated for each sale One is sent to the customer as a bill for the merchandise One is sent to accounting to record the sale One is shipped with the merchandise

Credit Memorandum Issued by the seller indicating the customer’s accounts receivable account has been credited for the amount of a: Return Merchandise returned for a refund Allowance Price reduction granted by the seller because of defects or other problems with the merchandise One copy of the credit memo is sent to the customer One copy is sent to accounting

2 Describe and use merchandise sales accounts.

Merchandise Sales Accounts SALES TAX PAYABLE SALES RETURNS AND ALLOWANCES SALES DISCOUNTS

Sales Account A REVENUE account used to record sales of merchandise. DR. CR. – + The account is credited for the selling price of merchandise sold during the period.

Credit Sale Journal Entry DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 100 00 2 Sales 100 00 3 Made cash sale 4 5 Example: Made a $100 cash sale. 6 7 8 9 10

Credit Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Cash 100 00 2 Sales 100 00 3 Made cash sale 4 5 6 What if this sale had been made on account? 7 8 9 10

Credit Sale Journal Entry DATE DESCRIPTION DEBIT PR CREDIT 1 Accts. Receivable/Customer 100 00 2 3 4 5 We would debit the accounts receivable account instead of Cash. 6 7 8 9 10

Credit Sale Journal Entry DATE DESCRIPTION DEBIT PR CREDIT 1 Accts. Receivable/Customer 100 00 2 3 4 5 Accounts Receivable is followed by a slash (/) and the name of the specific customer who owes the money. 6 7 8 9 10

Credit Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Accts. Receivable/Customer 100 00 2 Sales 100 00 3 Made credit sale 4 5 The sales account is credited because a sale has been made (even though the business has not yet been paid for the merchandise). 6 7 8 9 10

Sales Tax Payable Account A LIABILITY account used to record the taxes imposed on sales and owed to the taxing authority. SALES TAX PAYABLE DR. CR. – + The account is credited for the amount of tax imposed on the sale.

Sales Tax Payable Account A LIABILITY account used to record the taxes imposed on sales and owed to the taxing authority. SALES TAX PAYABLE DR. CR. – + The account is debited when the tax is paid to the proper taxing authority.

Cash Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 2 3 4 Example: Made a cash sale for $100 plus 5% sales tax. 5 6 7 8 9 10

Cash Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Cash 105 00 2 3 Sales tax would be $5 ($100 × 5%). Therefore, cash received would be $105 ($100 selling price + $5 tax). 4 5 6 7 8 9 10

Cash Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Cash 105 00 2 Sales 100 00 3 4 Sales is credited for the selling price, not the amount of cash received. 5 6 7 8 9 10

Cash Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Cash 105 00 2 Sales 100 00 3 Sales Tax Payable 5 00 4 Made cash sale 5 $5 sales tax is credited to Sales Tax Payable. 6 7 8 9 10

Cash Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Accts. Receivable/Customer 105 00 2 Sales 100 00 3 Sales Tax Payable 5 00 4 Made cash sale 5 6 If the sale is made on account, Accounts Receivable is debited instead of cash. 7 8 9 10

Sales Returns And Allowances Account A CONTRA-REVENUE account used to record sales returns and sales allowances. Shown as a deduction from Sales on the income statement.

Sales Returns And Allowances Account DR. CR. + – The account is debited when a customer returns merchandise or an allowance is granted.

Sales Return Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 2 Example: A credit customer, Susan Chang, returns printer cartridges (selling price $40 + $2 sales tax). 3 4 5 6 7 8 9 10

Sales Return Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Sales Returns and Allowances 40 00 2 3 Sales Returns and Allowances is debited for the selling price. 4 5 6 7 8 9 10

Sales Return Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Sales Returns and Allowances 40 00 2 Sales Tax Payable 2 00 3 4 Sales Tax Payable is debited for the tax of $2. 5 6 7 8 9 10

Sales Return Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Sales Returns and Allowances 40 00 2 Sales Tax Payable 2 00 3 Accts. Receivable/S. Chang 42 00 4 Issued credit memo for 5 returned merchandise 6 7 Accounts Receivable is credited for $42. 8 9 10

Sales Discounts Account A CONTRA-REVENUE account used to record discounts given to customers who buy merchandise on account to encourage prompt payment.

Sales Discounts Account DR. CR. + – The account is debited for the amount of the cash discount at the time of payment.

Credit Terms 2/10, n/30 2% discount off sales price

Credit Terms 2/10, n/30 If paid within 10 days

Or the total amount is due Credit Terms 2/10, n/30 Or the total amount is due

Credit Terms 2/10, n/30 Within 30 days

Credit Terms 1/10, n/30 1% discount if paid within 10 days or Total amount due within 30 days

Credit Terms 2/eom, n/60 2% discount if paid before end of month or Total amount due within 60 days

Credit Terms 3/10 eom, n/60 3% discount if paid within 10 days after end of month or Total amount due in 60 days

Sales Discounts Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 2 Example: Merchandise was sold for $100 with credit terms of 2/10, n/30, and cash is received within the discount period. 3 4 5 6 7 8 9 10

Sales Discounts Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Accts. Receivable/Customer 100 00 2 Sales 100 00 3 Made sale on account 4 5 The original sale on account is recorded at the full sales amount. 6 7 8 9 10

Sales Discounts Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Cash 98 00 2 Sales Discounts 2 00 3 4 Payment is received within the discount period and the 2% discount is taken by the customer. ($100 sale × 2% discount) 5 6 7 8 9 10

Sales Discounts Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 Cash 98 00 2 Sales Discounts 2 00 3 Accts. Receivable/Customer 100 00 4 Received cash on account 5 6 7 8 9 10

Sales Discounts Journal Entry $38,500 Less: Sales returns and allowances $200 Sales discounts 140 340 Sales Returns and Allowances and Sales Discounts are deducted from Sales in the revenue section of the income statement.

Sales Discounts Journal Entry $38,500 Less: Sales returns and allowances $200 340 Sales discounts 140 Net Sales $38,160

3 Describe and use the accounts receivable ledger.

Posting To The General Ledger In the general ledger account: Step 1: Enter the date. Step 2: Enter the amount of the transaction. Step 3: Enter the new balance. Step 4: Enter the journal page number. In the journal: Step 5: Enter the ledger account number in the PR column.

Accounts Receivable Ledger A separate “subsidiary” ledger Contains an individual accounts receivable account for each customer Often numbered Filed either alphabetically or numerically A summary accounts receivable account maintained in the general ledger is the controlling account

Posting To The Accounts Receivable Ledger In the accounts receivable ledger account: Step 1: Enter the date. Step 2: Enter the amount of the transaction. Step 3: Enter the new balance. Step 4: Enter the journal page number. In the journal: Step 5: Enter a slash (/) followed by a check mark () in the PR column.

Posting Sales to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 4 Accts. Receivable/E. Lorenzo 1,596 00 2 Sales 1,520 00 3 Sales Tax Payable 76 00 4 Sale No. 133C 5 Let’s review the posting for this transaction. 6 7 8 9 10

Posting Sales to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 4 Accts. Receivable/E. Lorenzo 1,596 00 2 Sales 1,520 00 3 Sales Tax Payable 76 00 4 Sale No. 133C 5 A $1,596 debit is posted to the general ledger accounts receivable account. 6 7 8 9 10

Posting Sales to the General Journal ACCOUNTS RECEIVABLE 122 Account: Account No. BALANCE DATE ITEM PR DR. CR. DR. CR. 20-- Balance 12,000 Apr. 1 J8 1,596 13,596 4 This entry is posted in the same manner as all other general ledger postings.

Posting Sales to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 4 Accts. Receivable/E. Lorenzo 122 1,596 00 2 Sales 1,520 00 3 Sales Tax Payable 76 00 4 Sale No. 133C The accounts receivable account number is entered in the PR column. 5 6 7 8 9 10

Posting Sales to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 4 Accts. Receivable/E. Lorenzo 122 1,596 00 2 Sales 1,520 00 3 Sales Tax Payable 76 00 4 Sale No. 133C 5 Now we need to post to the individual customer’s account. 6 7 8 9 10

Posting Sales to the Accounts Receivable Ledger Name: Enrico Lorenzo Address: 5240 Tousley Court, Indianapolis, IN 46224-5678 DATE ITEM PR DEBIT CREDIT BALANCE 20-- J8 1,596 1,596 Apr. 4 The date is entered, the amount is recorded, the balance is updated, and the journal page number is referenced.

Accounting For Sales Returns and Allowances-General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 May 5 Sales Returns and Allowances 40 00 2 Sales Tax Payable 2 00 3 Accts. Rec./S. Chang 42 00 4 Returned merchandise— 5 Credit Memo #72 6 Now let’s look at the posting for a sales return entry. 7 8 9 10

Accounting For Sales Returns and Allowances-General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 May 5 Sales Returns and Allowances 401.1 40 00 2 Sales Tax Payable 2 00 3 Accts. Rec./S. Chang 42 00 4 Returned merchandise— 5 Credit Memo #72 6 Sales Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column. 7 8 9 10

Accounting For Sales Returns and Allowances-General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 May 5 Sales Returns and Allowances 401.1 40 00 2 Sales Tax Payable 231 2 00 3 Accts. Rec./S. Chang 42 00 4 Returned merchandise— 5 Credit Memo #72 6 Sales Tax Payable is also posted in the normal manner. Its account number is recorded in the PR column. 7 8 9 10 11

Accounting For Sales Returns and Allowances-General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 May 5 Sales Returns and Allowances 401.1 40 00 2 Sales Tax Payable 231 2 00 3 Accts. Rec./S. Chang 122 / 42 00 4 Returned merchandise— 5 Credit Memo #72 6 The $42 credit is posted to the accounts receivable controlling account and to the subsidiary ledger account for S. Chang. 7 8 9 10

Posting Cash Receipts to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 14 Cash 1,596 00 2 Accts. Rec./E. Lorenzo 1,596 00 3 Received cash on account 4 Cash receipt transactions are posted in a similar manner. 5 6 7 8 9 10

Posting Cash Receipts to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 14 Cash 101 1,596 00 2 Accts. Rec./E. Lorenzo 1,596 00 3 Received cash on account 4 5 Cash is posted as usual. 6 7 8 9 10

Posting Cash Receipts to the General Journal DEBIT DATE DESCRIPTION PR CREDIT 20-- 1 Apr. 14 Cash 101 1,596 00 2 Accts. Rec./E. Lorenzo 122 / 1,596 00 3 Received cash on account 4 5 The credit is posted to the accounts receivable controlling account and to the subsidiary ledger account for E. Lorenzo. 6 7 8 9 10

Bank Credit Card Sales Are similar to cash sales because cash is available to the business as soon as an electronic deposit is made at the end of the day The credit card company makes the electronic deposit to the merchandiser’s bank account for the gross amount of credit card sales less a processing fee

Your Perspective – Retail Cashier

Bank Credit Card Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 May 6 Cash 100 80 2 3 4 Made a bank credit card sale of $100 plus sales tax of $5. The seller will receive cash of $100.80. ($105 – 4% fee) 5 6 7 8 9 10

Bank Credit Card Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT 1 May 6 Cash 100 80 2 Bank Credit Card Expense 4 20 3 4 Bank Credit Card Expense is debited for the processing fee. 5 6 7 8 9 10 10

Bank Credit Card Sale Journal Entry DEBIT DATE DESCRIPTION PR CREDIT PR 1 May 6 Cash 100 80 2 Bank Credit Card Expense 4 20 3 Sales 100 00 4 Sales Tax Payable 5 00 5 Made credit card sale 6 7 8 9 10

4 Prepare a schedule of accounts receivable.

Schedule Of Accounts Receivable Prepared to verify that the sum of the accounts receivable ledger balances equals the Accounts Receivable balance Is an alphabetical listing of customer accounts and their balances Usually prepared at the end of the month The total calculated in the schedule is compared with the balance in Accounts Receivable in the general ledger

Schedule of Accounts Receivable Northern Micro Schedule of Accounts Receivable April 30, 20-- Helen Avery $ 2,302 Susan Chang 651 Heidi Schwitzer 3,563 Ken Ulmet 3,315 Vivian Winston 4,500 $14,331 This should be the balance in the accounts receivable controlling account.

Errors If the schedule of accounts receivable total and the Accounts Receivable balance do not agree: Step 1: Verify the total of the schedule. Step 2: Verify the postings to the accounts receivable ledger. Step 3: Verify the postings to Accounts Receivable in the general ledger.